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The history of corporate IT has always been marked by extremes. One year, CIOs are centralizing IT; the next, federation is all the rage. It's all about enterprise software suites until a best-of-breed approach takes hold. Everyone believes that custom applications are the key to competitive advantage, and the next thing you know it's standardization or bust.

So as CIOs enthusiastically pursued IT outsourcing--and, more recently, offshore outsourcing--it was only natural to expect an eventual 180-degree turn.

But that's not exactly what's happening. CIOs who handed off the entirety of IT to a third party haven't brought it all back in-house. Technology leaders racing toward an 80-20 offshore-to-onshore ratio for IT service delivery didn't suddenly decide to invert those figures.

The shift in IT sourcing strategy has been subtler than that, but no less profound: CIOs today are taking a more surgical approach to outsourcing. A bias to send as much development work as possible offshore has been replaced by a predisposition to keep a greater portion of that nearby or in-house. And the once-shrinking category of the IT organization's core competencies has been quietly growing once again.

Take GE, the offshore outsourcing pioneer that began sending work to India more than 15 years ago. A bellwether for IT outsourcing, the $150 billion company once had half of its IT work being done by non-GE employees. Since 2009, GE has been moving to regain some of the technical capabilities it lost through offshoring and outsourcing--it's working to hire 1,300 IT and engineering professionals at its Advanced Manufacturing and Software Technology Center (AMSTC) in Michigan by 2013.

Once fully staffed, AMSTC will be GE's largest collection of IT experts. Workers will focus on innovation, like developing industry-specific monitoring and diagnostic tools, business and product intelligence systems, and data architecture strategy. "It mark[s] a significant investment in IT and in regaining some of the technical intellectual property we had outsourced in the past," says Ron Utterbeck, CIO for GE Corporate and AMSTC. In August 2011, the company opened the doors of its 200-person Information Security Technology Center outside Richmond, Va., and in February 2012 it announced the creation of a technology center for GE Capital in New Orleans, which is expected to employ 300 IT professionals.

That's a fraction of GE's 9,600 IT employees, but it's a significant shift in philosophy. And as GE goes, so goes much of corporate IT.

"We've almost reached a point of equilibrium," says John Dick, who was the CIO of Western Union until recently. Over the last five years, he settled on a model that has 65 percent of the company's 1,700-person IT workforce in-house and 35 percent employed under services contracts.

"Many organizations have been beefing up their internal organizations for several years now after outsourcing a good piece of their IT work," says Phil Fersht, founder of outsourcing analyst firm HfS Research. "In many cases, IT departments have moved out too much work that requires closer interaction with the business and an understanding of the organization's institutional processes. Many have had to feel their way in learning what balance of in-house [versus] outsourced works for them."

The 80-20 Ratio That Never Was

When Joe Sniado became CTO at Standard & Poor's six years ago, the company was in passionate pursuit of what many CIOs considered the ideal ratio of offshored to onshore IT delivery: 80-20.

And, like most IT groups, they never got there.

There was solid tactical and strategic reasoning behind the goal. "We needed to do a lot more work to support a business that was globally integrated. We needed to digitize our business," says Sniado, now CIO. "We didn't have sufficient staff in our New York office to get that done, and it would have been too expensive to build it out. That drove us to an offshore model."

But in 2008, S&P adopted new agile development processes to help the business increase speed to market. At first, agile and offshore didn't mix.

That's when they ran into headwinds on the journey to 80-20, says Sniado. "We were finding it hard to work with offshore teams with these new software methods," he says. S&P had to train its offshore outsourcers in its own version of agile development. Any offshore outsourcing veteran knows that to succeed, the customer may have to make an investment in adopting the processes of the vendor, but financing training in the other direction isn't often factored into the equation.

Even then, some of the offshore partners were slow, and that had a ripple effect on the business.

"We had to figure out how to deal with that, because that velocity was tied to how fast we could get new things into the marketplace," Sniado says. "We were frustrated."

Sniado eliminated suppliers that couldn't pick up the pace and required the rest to provide more on-site personnel. "That drove up costs but accelerated development," he says.

"The nature of technology projects is changing; people are doing smaller, more controlled projects with more agile-based methodologies that require that technical practitioners be involved in not just application development and testing, but also the entire process," says Jeff Wissink, partner with business and technology consultancy Navint Partners. "It's just not terribly practical to try to invoke the offshore model with these kinds of more fluid IT-governance structures, nor are the cost savings as tempting or obvious."

Sniado is now pushing providers for more offsite-but-local options, ideally two to three hours outside Manhattan--close enough to reach by train but far enough from corporate headquarters that salaries are 25 percent lower. "We're seeing a real limit on the type of work we can offshore," says Sniado. The 80 percent offshore objective has been discounted to at least 70 percent. For new development, it's closer to half.

Today, staff costs and overhead can be greater in India than in parts of the United States, when taken as a whole, according to Malcolm Swallow, principal adviser with KPMG. Wage inflation is 10 to 15 percent in India, while many American cities face wage deflation, he says. And given the importance of labor costs in the offshore outsourcing equation, that's a significant change. Recently, the Hackett Group predicted that the number of IT jobs heading offshore will plateau by 2014.

The 80-20 offshore-to-onshore ratio may have served a purpose for a time as a change-management tool, but it's likely outlived its usefulness. "As corporations, it's important to set stretch goals for people. And [that ratio] told people, 'Hey, things are going to change,'" says former CIO Andrew Wasser, now associate dean of the Heinz College School of Information Systems and Management at Carnegie Mellon University and head of its CIO institute. "But as with any tool or approach, you have to settle on a sweet spot, and some corporations may find that offshoring 25 percent is a slam dunk for them."

"Years ago, it was all about, 'How do I get that labor arbitrage? What are the roles and where can I source them?'" says Rich Pople, principal in charge of IT transformation consulting at the Hackett Group. "Now they're looking at that in the context of, 'What is the service I'm offering to the business and where is the rightful place to put that?'"

And newer automation and cloud computing options mean that traditional outsourcing is not the only option for CIOs who want to lower costs, meet variable demand, or increase efficiency, Pople adds.

While he was with Western Union, Dick juggled more than a dozen offshore outsourcing partners. "We had been through a pretty austere period with a renewed focus on cost. It was a play to self-fund more development," he says. The next step was "looking more at effectiveness and making sure that we have the right balance."

He winnowed his suppliers to three primary partners and took a more judicious approach to what goes offshore. In some IT functions, it might be as much as 70 percent. In others, staffing is largely domestic. "It has to be situational. It's really about right-sourcing," says Dick. With IT enabling the expansion of the company's online business, Dick built a support team in San Francisco. "Heavy Web development and rapid lifecycles just work better when people are colocated," he says.

The cost concerns that steered the company offshore haven't gone away, but the way he addressed them became more nuanced. "There's still a lot of pressure," says Dick. "You have to deliver the highest value you can for the dollar that's being invested."

Seeking the Right Mix

"Outsourcing--and a subset of that, offshore outsourcing--is a major part of how we deliver IT services," says Dan Priest, CIO of Toyota Financial Services, who inherited the model two years ago from a predecessor. It was always clear what IT competencies the company wanted to retain--architecture, requirements management, standards setting and business analysis, and quality assurance.

Until it wasn't.

As IT readied software changes to support the company's first new insurance product in 17 years, it ran into a problem. "There was a breakdown. We were losing records in the file transmission from one system component to another. And that second system component was a black box for us," says Priest. IT hadn't just outsourced the development of that component, it had outsourced the institutional knowledge associated with it. And it wasn't just outside the organization, it was ten time zones away. Instead of taking a day to remedy, it took a week.

"We moved so quickly into outsourcing. Hindsight being 20-20, you'd want to more gradually move towards the right [sourcing] mix," he says. "If I had to do it over again, we would have focused on keeping all tech lead roles in-house so that we understand not just what something does, but how it does it."

It's a logical approach, perhaps, but one that few considered in the past. "For a long time, that would not have been a popular notion, and not just at Toyota Financial Services," Priest explains. "The popular idea is that code is commoditized. You can outsource it. But it's very hard to separate perfectly the strategy and execution [of systems]."

Priest is trying to bring that lost knowledge back, but "we're never going to recapture it all. We have hundreds of systems," he says. So he's focusing on know-how about the company's most critical technologies. And he's shifting his sourcing strategy for new development. "There are certain positions related to integration, Web and mobile that in the past we would have outsourced that we're taking a second look at," says Priest. "We place a big premium on technology-enabled innovation, and we realized that the more we know about our systems, the better we are able to contribute."

Priest and his team now review completed projects to determine whether there's a correlation between a project's success and where it was done. "Anecdotally, we find that it's easier to solve and prevent problems when people are working in close proximity," he says. "We're going to do more onshore, if it's viable."

A project with a three-month turnaround, for example, is difficult to accomplish overseas. "We may have done it in the past for labor arbitrage reasons. But if it takes three times as many resources, you lose that," Priest says. "The more complex the problem is, the harder it is to solve offshore. We're trying to figure out the efficiency-effectiveness balance."

IT organizations are finally figuring out how to merge quality and cost metrics to calculate the total cost of offshoring, says Michael Engel, managing partner at outsourcing consultancy Sylvan Advisory.

"Many companies are realizing the critical role that IT plays in driving competitive advantage," adds GE's Utterbeck, who is bringing positions in architecture, middleware, ERP, security, compliance and business intelligence back inside the company. "We find that having these roles in-house helps us to build and foster a consistency in solutions and approaches that we just didn't have relying on external providers."

Textron CIO Gary Cantrell is actually offshoring more work, but he's shifting it to the conglomerate's captive IT operations in India, which sit alongside its growing overseas engineering facilities. "We have a three-pronged sourcing strategy--offshore, outsourced, and in-house," says Cantrell. "In the beginning, we went full bore, outsourcing everything from the hairline down. Over the last few years, we've brought pieces of that back that we felt we needed to control. Now we're insourced from the chest up."

Textron's 500-person offshore development center--which will double in size over the next year--is handling much of the previously outsourced business intelligence projects that have grown in strategic importance. But even for this offshoring veteran, there are limits to what he sends overseas.

"There are certain things that our offshore teams do very well. If you have a clear statement of work--even if it's complex--and require limited interaction, the project works very well," he says. More ambiguous projects requiring close interaction with a business partner or customer are less successful.